Gov. Sean Parnell's proposal for new taxes on the oil industry is not good legislation. Neither he nor his administration did a good job of selling this to the public.
The governor's proposal attempts to undo 2007's Alaska Clear and Equitable Share, which has a base net profits tax of 25 percent and a progressivity factor of 0.4 (starting at $30 per barrel of net profit or when the West Coast spot price reaches about $56 per barrel). The proposal intends to reward the oil industry for exploration, development and production.
The governor's proposal implies "take the money, we trust you, and we hope you help us." No assurances from the oil industry are required. No contract is entered into. It does not say "we'll do this if you do that." On March 27, Rick Harper, former ARCO Gas president, told the Legislature "the billions in tax reductions Gov. Sean Parnell is seeking are unlikely to spur the new production the state wants."
The "Make Alaska Competitive Coalition," led by Mark Hamilton, made presentations to the Chamber of Commerce in support of the proposal. Hamilton said the governor was unfairly criticized and that the critics have an unrealistic view of the way companies operate. Whoa! Every Alaskan has the right to challenge the way the oil industry operates. Few businesses commit $2 billion to a project on "a hope and a prayer" without extensive study leading to assurances of success. Even the University of Alaska's Institute of Social and Economic Research has doubts. Individuals who supported the proposal may not have done their homework before rushing to become part of the "herd mentality."
The governor ramped up pressure, along with MACC and the Fairbanks Daily News-Miner editorial board, to pass HB 110 and SB 49 -- with urgency. Very late in the game, ConocoPhillips pledged up to $5 billion (of which $3 billion is from the state) and about 90,000 barrels per day of additional production. Even later, on April 15, BP's John Minge seconded ConocoPhillips's pledge "and promised even more but said he couldn't be specific." Parnell chastised the Senate by calling them "do-nothing senators" and refused to debate Sen. Hollis French, D-Anchorage, on the issues.
Alaska's revenue commissioner has been evasive about the impacts of the governor's proposal, and the department is two years behind in its audit of the oil and gas industry. The labor commissioner admits to confusion with oil and gas industry employment numbers. So, how do we know how well ACES is working? We don't.
Alaska Senate President Gary Stevens addressed the Senate on April 11. I quote excerpts from that speech: "And where are the other two of the big three -- BP and Exxon? ... They are nowhere to be seen this session ... We need a comprehensive cost-benefit analysis. ... Remember we have already given them up to $2 billion in tax credits which were not used for new exploratory wells, but for maintenance ..."
Stevens also stated another consultant's report is not due until after the session.
Superior Court Judge Sharon Gleason found that the pipeline could flow until 2047 and possibly 2065. The court determined the pipeline could operate down to 200,000 and maybe 150,000 barrels per day. In spite of this, alarmists want you to believe the pipeline is about to shut down. It is not!
On April 11, Sen. Bill Wielechowski offered his preliminary cost-benefit analysis. Under Conoco Phillips's proposal, he said, "Alaskans give up roughly $13.5 billion in oil revenue between now and 2020 in exchange for about $3.2 billion in new state resources. ... That's a loss of $10.3 billion. I don't know many CEOs who would be OK with a deal like that."
A simpler and approximate cost-benefit analysis (ignoring tax credits and deductions) can be calculated. Multiply ConocoPhillips' promised 90,000 additional barrels by 365 days and by $110 per barrel. That's about $3.6 billion worth of additional oil annually. The state's effective tax rate is about 30 percent at $110 per barrel. So of the $3.6 billion, Alaska would get $1.1 billion and ConocoPhillips, ignoring tax credits, would get $2.5 billion.
Now this is really bad economics for Alaska -- giving up $2 billion to get $1.1 billion. Who in their right mind would do this? Apparently, the alarmists want you to.
Is the sky falling? No! Is the pipeline about to be shut down? No!
Parnell, MACC, the Chamber of Commerce and the News-Miner did an outstanding job of bringing the issue of oil exploration, production and development to the attention of Alaska. The Interior delegation, along with the Anchorage and Southeast delegations, put the brakes on this legislation so that we have time for a detailed analysis of the issues -- before we jump off the bridge.
Tim Tilsworth, Ph.D., P.E., is a professor emeritus of civil and environmental engineering at the University of Alaska Fairbanks.
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